UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7578
ELECTRO-CATHETER CORPORATION
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1733406
(State of Incorporation) (I.R.S. Employer ID Number)
2100 Felver Court, Rahway, New Jersey 07065
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 732-382-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of the issuer's common stock, as
of the latest practical date:
As of January 14, 1998, the number of shares outstanding of the
Registrant's common stock was 6,383,611 shares, $.10 par value.
<PAGE>
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
November 30, 1997 and August 31, 1997 1
Condensed Comparative Statements of Operations -
Three Months Ended November 30, 1997
and November 30, 1996 2
Condensed Comparative Statements of Cash Flows -
Three Months Ended November 30, 1997 and
November 30, 1996 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
INDEX TO EXHIBITS 10
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
November 30, 1997 and August 31, 1997
(Unaudited)
<CAPTION>
November 30 August 31
1997 1997
---- ----
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15,883 98,127
Accounts receivable, net 973,809 988,859
Inventories
Finished goods 412,824 481,660
Work-in-process 646,127 490,621
Materials and supplies 286,957 270,086
-------- ---------
Total inventories 1,345,908 1,242,367
Prepaid expenses and
other current assets 83,370 168,781
----------- ----------
Total current assets 2,418,970 2,498,134
Property, plant and equipment, net 746,804 777,663
Other assets, net 91,838 97,275
----------- ---------
Total assets 3,257,612 3,373,072
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership 75,000 -
Current installments of capitalized lease
obligations 55,000 50,734
Accounts payable and accrued expenses 1,135,723 1,045,406
Accrued litigation expenses 443,820 443,820
--------- -------
Total current liabilities 1,709,543 1,539,960
Subordinated debentures due to
T Partnership, excluding current
installments 1,772,125 1,747,125
Capitalized lease obligation, excluding
current installments 203,691 222,277
--------- ---------
Total liabilities 3,685,359 3,509,362
--------- ---------
Stockholders' deficiency:
Common stock 638,361 638,361
Additional paid-in capital 10,682,008 10,682,008
Accumulated deficit (11,748,116) (11,456,659)
---------- ----------
Total stockholders' deficiency (427,747) (136,290)
------------- ------------
Total liabilities and stockholders' deficiency $ 3,257,612 3,373,072
========= =========
See accompanying notes to condensed financial statements.
</TABLE>
1
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
November 30,
1997 1996
---- ----
<S> <C> <C>
Net revenues, including product sales,
research and development revenues
and license fees $ 1,335,313 1,677,750
Cost of revenues 864,846 814,995
--------- ---------
Gross profit 470,467 862,755
Operating expenses:
Selling, general and administrative 526,050 593,833
Research and development 163,018 212,567
------- -------
Operating income (loss) (218,601) 56,355
Other expense:
Interest expense (72,856) (54,700)
-------- -------
Net profit (loss) $ (291,457) 1,655
========= =====
Net loss per common share $ (0.05) 0.00
===== =====
Dividends per share None None
Weighted average shares outstanding 6,383,611 6,373,711
========= =========
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
November 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ (291,457) 1,655
Reconciliation of net profit (loss) to net cash (used in) provided by operating
activities:
Depreciation 32,508 31,313
Amortization 2,083 2,083
Changes in assets and liabilities:
Decrease in accounts receivable, net 15,050 105,643
Increase in inventories (103,541) (82,243)
Decrease (increase) in prepaid expenses and
other current assets 85,411 (19,623)
Decrease in other assets 3,354 172
Decrease in deferred revenues - (144,293)
Increase in accounts payable
and accrued expenses 90,317 108,430
--------- -------
Net cash (used in) provided by operating
activities $ (166,275) 3,137
========= ========
Cash flows used in investing activities -
Purchases of property, plant and
equipment (1,649) (40,447)
------- -------
Cash flows from financing activities:
Proceeds from loan and warrants
from T Partnership 100,000 -
Repayment of debentures and capitalized
lease obligations (14,320) (76,836)
------ -------
Net cash provided by (used in)
financing activities 85,680 (76,836)
-------- -------
Net decrease in cash (82,244) (114,146)
Cash at beginning of period 98,127 275,283
------ -------
Cash at end of period $ 15,883 161,137
====== ========
See accompanying notes to condensed financial statements.
</TABLE>
3
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
- ------ ---------------------
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position of
Electro-Catheter Corporation as of November 30, 1997, the results of operations
for the three months ended November 30, 1997 and November 30, 1996 and
statements of cash flows for the three months ended November 30, 1997 and
November 30, 1996, but are not necessarily indicative of the results to be
expected for the full year.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include disclosures normally
made in an Annual Report on Form 10-K. Accordingly, the financial statements
included herein should be reviewed in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1997.
Note 2 Subordinated Debentures
- ------ -----------------------
In September 1997 and again in December 1997, the Company borrowed
additional amounts from the T Partnership, in each case in the amount of
$100,000, under substantially the same terms and conditions as its previous
borrowings, without issuing any additional warrants. Under the current
arrangement, the Company is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by the Company with such covenant
would allow the T Partnership to declare an event of default and accelerate
repayment of indebtedness. The Company is currently in compliance with the
covenant. The total indebtedness due to the T Partnership at November 30, 1997
was $1,847,125.
Note 3 Commitments and Contingencies
- ------ -----------------------------
FDA Warning Letter
- ------------------
The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration ("FDA") of the United States
Department of Health and Human Services. Since the devices manufactured by the
Company are intended for "human use", as defined by the FDA, the Company and
said devices are subject to FDA regulations, which, among other things, allow
for the conduct of routine detailed inspections of device manufacturing
establishments and confirmation of adherence to "current good manufacturing
practices" ("cGMP") in the manufacture of medical devices.
In February 1997, the FDA conducted an inspection and audit of
Electro-Catheter Corporation. At the conclusion of the audit, the FDA issued a
number of observations regarding violations of cGMP. On March 11, the FDA issued
a Warning Letter to the Company requesting that prompt action be taken to
correct these violations.
4
<PAGE>
In response to the observations and the Warning Letter, Electro-Catheter
Corporation provided the FDA with a plan and timetable for instituting
corrective actions. The Company has been working diligently in its efforts to
correct these violations. A subsequent FDA inspection in September indicated
that while substantial progress had been made towards correcting the violations,
not all corrective actions have been completed. The FDA has issued a report
noting that no additional violations of cGMP were discovered and listing those
previous violations in the process of being corrected. At this time, the Company
is unable to precisely determine the short-term economic impact which will
result from instituting the corrective actions.
Litigation
- ----------
In September 1997, a jury in Middlesex County of the Superior Court of New
Jersey found the Company liable for age discrimination when it terminated an
employee in April 1994. The jury awarded the terminated employee $283,000. In
addition to the $283,000, the court awarded the plaintiff attorney's fees and
expenses and prejudgment interest in the combined amount of approximately
$47,990. The Company also incurred legal costs from September 1996 in the amount
of approximately $115,665. The Company is planning on taking an appeal, but all
related costs already incurred and awarded were recorded in the financial
statements for the year ended August 31, 1997.
Merger
- ------
On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., ("CCS") a Delaware corporation located in Palm
Coast, Florida, to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Currently, the structure of the transaction contemplates the merger of a
newly-created, wholly-owned subsidiary of CCS into and with the Company as a
result of which the Company shall become a wholly-owned subsidiary of CCS. The
transaction further contemplates an exchange of common stock of the two
companies, with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10 par value
per share. Upon closing of the transaction, $1 million of the Company's senior
debt is intended to be converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) the execution of a definitive agreement reflecting the intentions of the
parties; (iii) the approval of the transaction by the Board of Directors of each
company; (iv) the approval of the transaction by the shareholders of
Electro-Catheter Corporation; and (v) the receipt of all required regulatory
approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
Note 3 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1997
presentation.
5
<PAGE>
Note 4 Earnings Per Share
- ------ ------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS
128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share
and specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock. SFAS 128 is
effective for financial statements relating to both interim and annual periods
ending after December 15, 1997. As the Company's stock options are antidilutive,
assuming the treasury stock method, the calculation presented is the "basic"
calculation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Results of Operations
- ---------------------
On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., ("CCS") a Delaware corporation located in Palm
Coast, Florida, to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Currently, the structure of the transaction contemplates the merger of a
newly-created, wholly-owned subsidiary of CCS into and with the Company as a
result of which the Company shall become a wholly-owned subsidiary of CCS. The
transaction further contemplates an exchange of common stock of the two
companies, with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10 par value
per share. Upon closing of the transaction, $1 million of the Company's senior
debt is intended to be converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) the execution of a definitive agreement reflecting the intentions of the
parties; (iii) the approval of the transaction by the Board of Directors of each
company; (iv) the approval of the transaction by the shareholders of
Electro-Catheter Corporation; and (v) the receipt of all required regulatory
approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
Net revenues declined $342,437 (20.4%) for the three months ended November
30, 1997 as compared to the three months ended November 30, 1996. Product
revenues declined $232,040 (15.9%) and contract research and development
revenues declined $144,293 (100.0%) for the three months ended November 30, 1997
as compared to the same period last year. This decline was partially offset by
an increase in sales to an original equipment manufacturing ("OEM") customer
($12,042) and revenues from licensing certain of the Company's technology to a
third party ($21,854).
6
<PAGE>
Direct domestic sales decreased $147,270 (14.5%) for the three months ended
November 30, 1997 as compared to the same three months of the prior year. This
decrease is attributed to the Company not having an approved electrophysiology
ablation catheter, lack of new products (as the Company has focused its
engineering efforts on contract research and development and OEM business), a
continued decline in demand for the Company's older products in pacing and
monitoring, backorders, as well as the impact of not replacing sales
representatives who have left the Company. International revenues decreased
$84,770 (19.1%) for the first three months of fiscal year 1998 as compared to
the first three months of fiscal year 1997. The decline in international
revenues is attributed to the lack of new products (as the Company has focused
its engineering efforts on the contract research and development and OEM
business), lower demand for the Company's electrophysiology products, product
redesign problems, pricing pressure due to competition and backorders.
Gross profit dollars decreased $392,288 (45.5%) for the three months ended
November 30, 1997 as compared to the three months ended November 30, 1996. This
decrease is primarily attributed to decreased production levels related to the
lower sales volume. The gross profit percentage for the three months ended
November 30, 1997 was 35.2% as compared to 51.4% for the three months ended
November 30, 1996. The lower volume continues to adversely impact gross profit.
Selling, general and administrative expenses decreased $67,783 (11.4%) for
the three months of the current year as compared to the same period in the prior
year. This decrease primarily reflects lower domestic and international selling
expenses, substantially attributable to the loss of field sales personnel that
have not yet been replaced, and to cutbacks in international sales and marketing
activities. This decrease was partially offset by increased expenses associated
with efforts toward the merger with Cardiac Control Systems, Inc.
Research and development expenses decreased $49,549 (23.3%) for the three
months ended November 30, 1997 as compared to the same three month period in the
prior year. The decrease is primarily the result of decreased engineering
efforts and lower material, supply, consulting and recruiting expenses. In the
prior fiscal year, costs associated with contract research and development
activities were charged to cost of revenues.
Interest expense increased as a result of the increased borrowings from the
T Partnership as well as interest paid on capitalized lease obligations.
The net loss for the three months ended November 30, 1997 was $291,457 or
$0.05 per share as compared to a net profit of $1,655 or $0.00 per share for the
three months ended November 30, 1996.
Liquidity and Capital Resources
- -------------------------------
At November 30, 1997, working capital decreased $248,747 to $709,427 from
August 31, 1997. The current ratio was at 1.4 to 1 at November 30, 1997 as
compared to 1.6 to 1 at August 31, 1997. Net cash used in operating activities
was $166,275 for the three months ended November 30, 1997 as compared to $3,137
net cash provided by operating activities for the three months ended November
30, 1996. This increase in cash required for operations is a result of the
increase in the Company's losses and a higher inventory level offset partially
by an increase in accounts payable and accrued expenses and a decline in
7
<PAGE>
other assets. The Company has been able to satisfy its obligations with
borrowings from the T Partnership, cash on hand and extending its accounts
payable.
In September 1997, a jury in Middlesex County of the Superior Court of New
Jersey found the Company liable for age discrimination when it terminated an
employee in April 1994. The jury awarded the employee $283,000. In addition, to
the $283,000, the court awarded the plaintiff attorney's fees and expenses and
prejudgment interest in the combined amount of approximately $47,990. The
Company is planning on taking an appeal and determining the costs attendant
thereto, but all related costs already incurred and awarded were recorded in the
financial statements for the year ended August 31, 1997.
The Company's ability to continue with its plans is contingent upon its
ability to either obtain sufficient cash flow from operations, obtain additional
financing, or consummate a combination with another company. The Company has had
difficulty in paying its obligations and, as a result, has delayed payments to
some vendors. The Company continues to evaluate its plans to obtain funds. The
contemplated merger is contingent upon the Company and CCS raising sufficient
capital to support each Company's product development efforts. Management
believes that this merger can offer benefits to both companies by taking
advantage of economies of scale and elimination of redundant efforts. However,
there can be no assurance that the merger will be consummated or that the
Company will be able to generate the funding required.
Inflation did not have a material impact on the results of the Company's
operations for the three months ended November 30, 1997.
Part II. Other Information
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed or incorporated by reference as part
of this Quarterly Report on Form 10-Q are listed in the
attached Index to Exhibits.
(b) The Company filed a Current Report on Form 8-K dated
October 7, 1997, which reported under "Item 5. Other
Events" a verdict in certain litigation in which the
Company had been involved. Also, the Company filed a
Current Report on Form 8-K dated November 7, 1997,
which reported under "Item 5. Other Events" the
execution of a letter of intent with Cardiac Control
Systems, Inc. contemplating the merger of the two
companies.
8
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
/s/Ervin Schoenblum
Date January 15, 1998 Ervin Schoenblum
- ---- ---------------- ----------------
Acting President and
Chief Operating Officer
/s/Joseph P. Macaluso
Date January 15, 1998 Joseph P. Macaluso
- ---- ---------------- ------------------
Chief Financial Officer
9
<PAGE>
INDEX TO EXHIBITS
27 - Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 1,125
<ALLOWANCES> (1,527)
<INVENTORY> 1,346
<CURRENT-ASSETS> 2,419
<PP&E> 5,262
<DEPRECIATION> (4,515)
<TOTAL-ASSETS> 3,258
<CURRENT-LIABILITIES> 1,710
<BONDS> 0
0
0
<COMMON> 638
<OTHER-SE> (1066)
<TOTAL-LIABILITY-AND-EQUITY> 3,258
<SALES> 1,285
<TOTAL-REVENUES> 1,335
<CGS> 865
<TOTAL-COSTS> 1,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (73)
<INCOME-PRETAX> (291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
